Short call option positions expose traders to high risk. NSE, therefore, requires traders to post margins to reduce the risk of default. These margin requirements significantly reduce if a trader has a long position that covers the naked short. A bear call spread, which involves a short lower strike call and a long higher strike call, will have lower margins than a naked short call. This week, we compare these two positions to see which position is optimal for a given view on an underlying. 

Margin strategy

Suppose you short a call option on the Nifty Index. The next-week 23950 Nifty call trades at 425 and requires a margin of about 2.25 lakh. What if you instead go short on the 23950 strike and long on the 24400 strike? This bear call spread can be set up for a net credit of 217 points. You will have to post a margin of 63000, a significant margin reduction of 1.62 lakh. The flipside is that your maximum gain will also be lower (217 points against 425 points on the naked short position). 

Is it optimal to give-up 208 points to save 1.62 lakh margin? It would be, if this capital is deployed in another trade, and the gain you expect from the trade is more than the points you gave up (208 points) to save the trading capital. But this argument presupposes that you have identified another trading opportunity when you set up the bear call spread. 

What if are unable to find one? The argument would be that you will park the saved margin amount in an interest-bearing instrument till the time you deploy the capital. You must, therefore, compare the return on that instrument with the return given up by initiating the spread. If the return on the instrument is higher, then the spread is an optimal choice. Note that the argument is based on a premise that you are setting up the spread with a sole objective of saving on the margin so that the capital can be deployed elsewhere. The motivation for the bear call spread is not to reduce the greater risk in the naked short call. This assumption is reasonable because experienced traders who short can manage the position with strict stop limits. 

Optional Reading

Options on the Nifty Index are cash-settled. Nevertheless, short call positions require margins because of high gamma risk; a sharp increase in the underlying price can lead to increase in option price because of change in delta accelerated by the gamma. This margin requirement should not be confused for the margins collected to manage delivery risk. Those margins are imposed by your broker on open long positions starting four days before expiry on in-the-money (ITM) equity options. Finally, note that margin payments do not increase your transaction cost, but affects your cash flows. Comparing bear call spread with naked short call is about the opportunity cost associated with the strategy. 

(The author offers training programmes for individuals to manage their personal investments)

Published on March 14, 2026